Trump Is Doing Australian Bank Shareholders a Favor: Gadfly


 Bloomberg

(Bloomberg Gadfly) -- That infamous weekend phone call between Donald Trump and Prime Minister Malcolm Turnbull notwithstanding, shareholders in Australian banks should be grateful for the U.S. president's appreciation of their dividend checks.

Even before Trump signed the executive order to review the Dodd-Frank banking regulations, expectations that big financial institutions worldwide would be given a longer regulatory leash were gaining ground. "A diluted, deferred" Basel IV regime is in the cards, Bloomberg Intelligence analyst Tomasz Noetzel noted in early January, after the world’s top regulators postponed a meeting to finalize the next set of rules on minimum capital.

The powwow is superfluous now. With the president seeking more relaxed norms for U.S. lenders, it's doubtful if struggling European institutions and their harried supervisors will be in any mood to adopt harsher standards for themselves.

Outside of Europe, the one place where this would bring palpable relief is Australia, which was worst-placed to deal with a further tightening of capital requirements, according to a Morgan Stanley analysis.  

When it comes to being well-capitalized, the nation's four largest lenders -- Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group and National Australia Bank -- are at the top of the league table of the developed world's largest institutions. But regulators in the lucky country didn't want banks to mar the economy's track record of going without a recession for a quarter century. So they vowed to treat the Basel Committee's new standards as the bare minimum.

This hawkish approach is undoubtedly prudent. Had Basel IV standards arrived just as the lenders' profitability was starting to weaken, things could have gone south for shareholders. That's because large Aussie lenders would have suddenly looked a lot weaker if they could no longer assess their risk exposure using internal models. 

Possible 2018 increase in risk assets under Basel IV

38%

According to Morgan Stanley's calculations, the big four might have been staring at a 38 percent increase in their risk-weighted assets in 2018 under the new rules. By contrast, Singapore, Hong Kong and Japan would have seen increases of between 3 percent and 14 percent. Even if the final Basel rules took a more relaxed view of projects loans or credit secured by commercial property, the credit risk on Aussie banks' balance sheets would still have ballooned by 25 percent for the four lenders, exposing them to a 19 percent downside in valuations, in Morgan Stanley's estimates.

Australian banks retain very little of their profits, confident that fat payouts will entice shareholders to dividend reinvestment plans that help rebuild capital. Ordinarily, that works fine. However, what if these are not ordinary times?

As Bloomberg News reported on Wednesday, early signs of stress are emerging in the country's housing market. In the mining state of Western Australia, where a commodity-led investment boom has gone bust, one in 10 mortgage holders has little or no equity buffer, according to a Roy Morgan report.

A risk of capital erosion just as rising loan-loss provisions depress earnings would have been unwelcome news. So Trump may be doing Aussie bank shareholders a favor by putting the clock back on financial reforms. Maybe he should mention this generosity in his next call with Turnbull.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

©2017 Bloomberg L.P.

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